Paul Krugman is out with a review of Tim Geithner’s book, ‘Stress Test,’ and he is sceptical with some of Geithner’s claims.
Geithner argues he would have preferred additional stimulus and debt relief during the financial crisis, but was prevented from acting further because of political and practical problems.
Krugman, winner of the economics Nobel prize, has consistently argued that more stimulus and easy monetary policy was — and still is — needed for the U.S. economy to fully recover from the financial crisis.
Krugman writes that Geithner would have readers view the response to the financial crisis as a success. The only way to consider the recovery to the financial crisis a success, writes Krugman, is by comparing it with the Great Depression.
But Krugman does not believe clearing this bar is worth celebrating.
Krugman’s primary problem, it seems, with Geithner’s response to the crisis is that it responded to a financial crisis, not an economic one. And once the banks were recapitalized and stress-tested, banks and markets recovered but the real economy did not.
After the financial sector was steadied, Krugman writes, the government did too little fiscal stimulus and provided no debt relief, writing that, “the administration’s efforts to help homeowners were so ineffectual as to be risible.”
Krugman writes that as an account of the financial crisis the book is worth reading, but ultimately Geithner is wrong about the outcome of the economy’s proverbial “stress test.”
“You can argue that a bigger stimulus plan would have failed to pass Congress; you can argue that mortgage refinancing would either have proved impossible to implement or have provoked a huge political backlash. The truth is that we’ll never know, because the Obama administration never really tried to push the envelope on either fiscal policy or debt relief. And Geithner’s influence was probably an important reason for this caution. Geithner saw the economic crisis as more or less entirely a matter of lost confidence; he believed that restoring that confidence by saving the banks was enough, that once financial stability was back the rest of the economy would take care of itself. And he was very wrong.”
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